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What Gives Rise to “Crony Capitalism”?

The term crony capitalism has appeared frequently in the popular press of late, but rarely has it been used—let alone defined—in the academic literature. Independent Institute Research Fellow Randall G. Holcombe, a frequent contributor to The Beacon, helps remedy this deficiency in an article published in the Spring 2013 issue of The Independent Review. “Crony capitalism,” he writes, “is an economic system in which the profitability of business depends on political connections.”

Holcombe’s definition makes no claims about the causes, effects, or moral status of “crony capitalism.” But by cutting to the heart of the matter—by identifying the phenomenon’s fundamental difference from other economic systems—it opens new avenues of understanding. One way it does so is by implying that we should look at a broad range of examples in which political connections shape the profitability of businesses. Holcombe’s article examines four types: rent-seeking, regulatory capture, political entrepreneurship, and interest-group politics.

The academic literature abounds with studies of these components of “crony capitalism,” but I don’t believe that a comprehensive theory of the phenomenon has ever been offered—although Holcombe’s piece makes important contributions.

What would a valid theory reveal? One key finding that it would elucidate, an aspect emphasized by Holcombe, is that “crony capitalism” grows as the profitability of businesses comes to depend on how well businesses can secure government subsidies, tax breaks, and regulations that work in their favor.

“Crony capitalism,” in other words, is a by-product of big government.

[A different version of this post first appeared in the April 2, 2013, issue of The Lighthouse. To receive this weekly newsletter, please enter your email address here. For information about The Independent Review, including a free book offer with new subscriptions or renewals, please click here.]